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Turn
g
in
a Corner
As CEO of Valero spinoff, Bowers brings
fresh energy to new retail brand
By Angel Abcede || aabcede@cspnet.com
Photos by Mark Sobhani
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CSP
January 2014
39
Out of the Shadows: Key to CST’s
success will be Corner Store’s ability to
step out of Valero’s shadow.
A
s Kim Bowers made her first
round of visits to the newly
spun-off, 1,900-store CST
Brands, she dismissed the corporate
veneer and mixed with folks at the store
level. She blended in beautifully, surprising many of the Hispanic employees with
polished Spanish.
Her fluency went viral through
CST. As she stepped into the next store,
greetings in Spanish quickly followed as
employees approached the new president
and CEO of Valero’s yet-to-debut Corner
Store.
The kinship prompted them to joke
with a non-Spanish-speaking district
manager: “Now we can talk about you.”
Bowers, 49, is winning followers down
the line from store clerks to national
pundits, recently being ranked No. 38 on
Fortune magazine’s list of the country’s 50
most powerful women.
She accepts the attention with uncommon ease.
As if bringing a publicly traded network of bolted-together, Big Oil store
formats into a new era of convenience
retailing weren’t difficult enough, Bowers
has a disarming confidence that’s at once
pragmatic yet optimistic. She’s fully aware
of the chain’s legacy network while at the
same time enthusiastic about the promise
of its ground-ups and the chain’s evolving
foodservice focus.
“We have almost 1,000 of what we
would define as legacy locations, so we
can’t build enough sites for them to be
irrelevant. But at the same time,” she
quickly adds, “our new stores can compete anytime, anywhere.
“Competition is competition. We’re
Seasoned and New: CST’s retail team
includes veterans of Valero’s retail past
such as Tony Bartys (left) and Hal Adams.
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not afraid of it.”
Maybe what Bowers needs to fear is a
carnivorous Wall Street, whose rapacious
expectations could very well exceed CST’s
best performance.
In mid-December, stock prices for
CST were in the $34 range, while Corpus
Christi, Texas-based Susser was at $63
and Ankeny, Iowa-based Casey’s General Stores was at $75. Dubbed from the
outset as a single-digit, “slow growth”
investment by many financial houses, the
fledgling CST network has a lot to prove.
Will the maturity of its older assets
weigh down the promise of its aggressive
new-build pace—projected to double in
2014, with 30 stores on the map compared to 15 that came online last year?
Add to that its yet-to-be-realized foodservice potential and overall brand offer,
and the uncertainties build.
At press time, the company was still
field-testing the brilliant yellow color
scheme of its Corner Store logo, a clear
sign that the step out of Valero’s shadow
may be more of a leap.
And yet, one senses that despite obvious roadblocks, CST is the most prepared
of any oil-company spinoff to perform
well in the public limelight.
Consider the pieces in place:
▶ An executive team in sync with
each other and what customers want
from convenience, ready to abandon a
pump-first Big Oil mentality.
▶ Ownership of 81% of the land
beneath its stores, along with $300 million in cash from new fuel-contract terms
and access to a large credit line, which
puts it in a solid financial position.
▶ The beginning of a retail culture that
prioritizes the feel and flow of stores, as
well as a friendly front-line environment.
▶ A distinctive foodservice mentality set to execute at the store level, having gone as far as developing original
successes such as a savory “kolache”
(think pig in a blanket).
▶ A private-label program as extensive as any in the industry, capturing
consumer trust despite essentially being
tied to a gasoline brand.
▶ The “perfect storm” of the Texas
c-store demographic, a mix of Hispanics and energy and construction workers who, according to Bowers, result in
stores that in some areas “just can’t keep
product on the shelves.”
During an exclusive interview with
CSP in November, Bowers and her team
exuded a confidence blended with a sense
of opportunity and challenge. For certain,
the pillars of strong equity, modest debt
and a solid strategy are emboldening the
San Antonio chain to embrace a retail
personality that received only modest
attention while under the multibilliondollar Valero refinery business.
Changes are taking place both culturally and among the stores’ product
assortment. New policy changes include
a jeans-all-week dress code and mandatory days in the field for administrative
staff. On the culinary front, a new food
czar is sizing up CST’s menu potential.
“We’re lucky [in that] this is a new
company, but it’s not,” says Hal Adams,
senior vice president and chief marketing
officer for CST, referring to how it ran
stores for 20 years under Valero’s watch.
“We’re pent-up dogs ready to run.”
Bowers’ Power
The retail prowess and passion Adams
mentions is what made the offer of running Valero’s retail spinoff attractive,
Bowers says. Groomed for leadership
under Valero Energy’s top boss, Bill
Klesse, Bowers emerged not from the
retail end but from the legal side of the
business, operating for years as part of
the company’s M&A team.
This team spearheaded much of the
acquisition growth that would make
Valero the nation’s largest independent
refiner-marketer. (See the company’s
M&A history on p. 44.) She joined Valero’s legal department in 1997, became
vice president of legal services in 2003
and subsequently worked in compliance, legal affairs and engineering. She
was executive vice president and general
counsel at the time she was elected to
lead CST one year ago.
During her rise, she’s had high-level
discussions about what to do with a
sprawling retail network built largely as
an afterthought of a rapidly expanding
refining universe. Break up the assets?
Find a single bidder? File an IPO?
Eventually, the idea of a spinoff to
shareholders prevailed. After obtaining a
special tax-exempt letter from the Internal Revenue Service, Valero gave current
shareholders a single stock of CST for
every nine held in Valero. The remaining
20% would stay with Valero under an
agreement that they would sell it on the
open market at some future date.
All this finalized May 1 of last year
when, as a spinoff company, CST
Brands Inc. went public.
Heavy Lifting
Though CST enjoys the desirable
advantage of owning most of its dirt,
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January 2014
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CST by the
Numbers
CST Brands’ numbers speak to the
company’s challenges as a network, but
also its scale and the opportunities it
has to grow via new builds and M&A.
1,900
Number of company-run c-stores
in the United States and Canada
1,000
Number of “legacy” locations
that don’t fit the 4,500- to
5,500-square-foot model
87 and 250
Number of kiosk (less than 1,000
square feet) and small-format sites,
respectively, in CST’s network
61%
it also faces the difficulty of a legacy
network and the potential investment
needed to keep those locations viable.
A source close to c-store development
in Texas says the “oil-company mentality” would often mean initial efforts to
improve those locations failed as those
in charge started to realize the true costs
of what was needed.
Everything from making restrooms
compliant to the Americans with Disabilities Act (ADA) standards to equipping a
site with a proper foodservice program
added up. Even rebranding the stores to
a single, unified logo costs money.
“I know in one instance, the company
only went so far and then got scared,” the
source says.
While conceding that CST “does not
have deep pockets” in its spinoff incarnation, as mentioned, it does own 81% of
the land beneath its stores. And while
reasonably leveraged with a low-interest, $500 million term loan, it “hit the
bond market at the best time ever” and
has $550 million in bonds, plus a credit
revolver it hasn’t touched. In addition,
moving payment schedules on its fuel
contracts from two to 10 days freed up
$300 million in cash.
But how CST taps its resources will be
critical, the source says. He refers to Tulsa,
Okla.-based QuikTrip, saying, “People
envy [QuikTrip] and try to copy bits and
pieces of that program, but nobody wants
to pay for all of it.”
The key is having a clear mission, the
source says. Referring to Chicago-area
supermarket chain Dominick’s, which
ceased business in that market, “It lost
its mission, became a common, everyday
grocery store and plain went downhill.”
While recognizing CST’s challenges,
Bonnie Herzog, managing director of
beverage, tobacco and convenience store
research for Wells Fargo Securities, New
York, expressed optimism in a report on
the company released last fall.
The chain is “on the cusp of an
accelerated growth trajectory,” she said,
attributing her prediction to CST’s focus
on merchandise offers, larger formats
Percentage of CST stores in Texas
81%
Ownership of store property in
United States
2,200 square feet
Average store size
$12 billion
Revenues in 2012
$32.53 per share
Price at which CST was trading in
December 2013
Food Foundation: Original kolaches, whoopie pies and tacos provide a base for
foodservice development at Corner Stores going forward.
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History of CST
1980
Acquires Ultramar Diamond Shamrock, becoming one of the three
largest refiner-marketers in the United States. The purchase entails
parts of the former National Convenience Stores (NCS) network,
including its larger, hexagonal stores.
Valero is born as the
corporate successor of
LoVaca Gathering Co.,
a natural-gas gathering
subsidiary of the Coastal
States Gas Corp.
2001
2000
Acquires Benicia Refinery, an ExxonMobil
refinery near San Francisco; with it comes
270 retail sites, which represents its entry
into retail.
and new builds. She cautioned, however,
that its current stock valuation “already
reflects this unrealized potential.”
Retail Mindset
Part of the assets that make up CST
today have experienced similar ups
and downs. Part of its legacy came from
Houston-based National Convenience
Stores (NCS), which like 7-Eleven and
Circle K in the 1970s and ’80s engaged
in a reckless M&A expansion strategy,
only to fall into bankruptcy.
Adams came from the NCS side,
which in its struggles to reinvent itself
created a hexagonal design of largerformat locations that remain prominent
in many Texas markets today.
Then the dominos that led to CST
began to fall. Regional refiner Diamond
Shamrock scooped up NCS. Three years
later, that entity merged with Canadian
refiner-marketer Ultramar along with
Beacon Oil as part of a large consolidation play. In 2001, David acquired
Goliath as Valero—at the time a smaller
company—picked up Ultramar Diamond Shamrock (UDS) to create what
is known today as Valero. (“Valero”
comes from the Spanish name for the
Alamo fortress in San Antonio.)
That patchwork of about 2,300 stores
would slim down as the company jettisoned smaller formats or withdrew
from weak markets. The move to a
leaner retail portfolio also allowed the
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company to better categorize its formats, creating groupings of like stores
(such as hexagonal stores and kioskstyle locations) vs. a broader spectrum
of formats, Bowers says, making the
“
Competition is competition.
We’re not afraid of it.”
diversity more manageable.
With a network of 1,500 stores, thenValero head Bill Greehey had a vision.
Though Valero had a refining presence,
it had no name recognition on the retail
end. Putting the Valero logo on all those
canopies gave the sites instant brand
recognition.
“We plowed a lot of capital into the
stores,” Adams says. “We wanted them to
look welcoming and provide a good face.”
Greehey also had an affinity for the
store-level employee. “Everybody mattered and everybody deserved a chance,”
Adams recalls. “It was already a core
value to treat people fairly and well.”
As Klesse followed Greehey, the
vision for retail only grew.
In 2006, according to Tony Bartys,
senior vice president and COO for CST,
Klesse dispatched several executives to a
2013
Valero spins off retail operations
to CST Brands Inc.
California Valero jobber who had been
building 10,000-square-foot stores.
While Bartys and his group decided that
the rural concept wouldn’t fly in many
of Valero’s markets, they developed a
5,600-square-foot plan, with food being
40% of the offer.
In addition to roller grills, the company started the kolache program,
which evolved from a sweet snack into
a savory one. It also paved the way for
a series of kitchen layouts and in-store,
made-to-order concepts that continue
to evolve today.
Yet despite the headway, retail would
never garner the necessary attention
while tucked inside a refining-first
culture. About six years ago, Klesse set
in motion plans to operate retail as a
separate entity within the company.
Adams recalls how the retail department
paid for legal, financial and corporate
services, even though it was still a part
of Valero.
“We did it so that we could have our
own balance sheet and income statement to prove our potential,” Adams
recalls. “Then [in 2012], we started the
process to see what was the most viable
way to break the company apart.”
Bringing Down the Wall
For all the fanfare that accompanied her
taking on CST, Bowers did not ignite
her first weeks as top executive with
highfalutin retail fireworks. Her first
Heart of Texas: A growing
population of Hispanics and energy and
construction workers makes Texas a
great market for CST and other c-store
chains.
step was the proverbial blocking and
tackling: developing an administrative
infrastructure for the new company
and injecting new talent in the areas
of finance, accounting and technology.
Foundationally stronger, CST is now
focusing on growth, maximizing existing
assets, expanding market strongholds
with larger formats and, just as important, emblazoning a distinctive brand
cachet that separates itself from the more
formal Valero profile.
To this end, when the company
officially went public last May, Bowers
instituted a more informal dress code
of jeans and a company shirt, throwing
in the option of men having facial hair.
(It had been deemed against corporate
values because workers at Valero’s refineries had not been allowed facial hair for
safety reasons.)
Bowers wanted to demonstrate a clean
break. So although CST’s offices share the
same campus as Valero, Bowers wanted
the vibe at CST to be more relaxed, from
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opening up the offices to allow more fluid
brainstorming to casual attire.
“And I like wearing jeans, so it was also
self-serving,” she says.
To unify this burgeoning culture,
she mandated “Corner Store Time,” a
required two days of work at the stores
annually for all administrative employees
(five for leadership staff), with bonuses
tied to their completion. And in the fashion of retailer Nordstrom, she also holds
entire departments accountable. If one
person doesn’t do their time, no one gets
their bonuses, initiating a sense of group
responsibility.
The plan has helped open up discussions from the top down, allowing even
entry-level cashiers access to top-level brass.
Bowers is also reviewing store-level
incentives, recognition and community
activities, both creating and initiating new
ideas to help folks connect at all levels.
It’s a way of creating the kind of culture needed at Corner Stores, especially
those without the space for expanded
On the Menu
foodservice or in areas that compete with
top-notch retailers.
“The challenge is corner by corner
vs. store format,” she says. “As long as we
continue to give great customer service
[we can compete], even if we’re not in the
bright, shiny boxes.”
With an eye on developing a unified program, CST’s new foodservice
director, Richard Poye, says he looks
at everything from supply to storelevel execution.
“You look at the steps and
remove things that don’t benefit the
dish or add to safety,” he says. “You
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Food Future
go for better-tasting food and what
After spending time in the world of
restaurants and in the galley of a naval
ship, Richard Poye now walks the aisle of
c-stores with fresh eyes.
As CST’s new foodservice director,
Poye was spending his first weeks on the
job when he talked to CSP, taking mental
note of existing facilities, processes and
products.
“How do you come into existing stores
and develop concepts that can work with
the infrastructure of that store?” he says.
“It’s a challenge, but it’s not impossible.”
Another challenge is luring patrons
who might not otherwise be drawn to just
another roller-grill menu, while simultaneously not alienating core customers.
That’s where there may be opportunities
unique to CST. Patrons are already loyal
to its eclectic tastes, including whoopie
it takes to streamline the process.”
He also tips his hat to what CST
has already done, creating original
foodservice items, developing kitchens at many of locations and putting
that foodservice mindset in front of
its customers.
pies and kolaches, so possible opportunity exists in healthy or energizing food
options, he says.
Either way, quality is important, Poye
says. “How we offer food in a c-store has
to be as good as any QSR, fast casual …
or any of our great [c-store] competitors,”
he says. “Our food needs to be that good
if we are to survive in this business.”
Equally important, says Adams, is to
view food not from traditional day-parts.
“We get so tied up in food being a com-
plete meal,” he says. “People are now eating six times a day, eating when they can and in small bits. That’s what we’re good at.”
Going forward, according to Adams, execution will be key.
The way kitchens are laid out, what ingredient sits where, what’s
delivered precooked and how meals are prepared—these are all
things that will make or break a foodservice program.
“We’re so bullish on the 30 [new-to-the-industry] stores
we’re planning, because we know the percentage of food we can
sell will be exponentially better than what we have in existing
stores,” Adams says. “In a new store, consumers will give you
permission to sell food.”
The Fate of Fuel
In an about-face of his enthusiasm over food, Adams
addresses the importance of taking fuel out of that particular
equation, getting the pump traffic and parking obstacles out
of the way of the food purchaser.
Both Adams and Bartys seem to have reached the same
conclusion: The fuel-only customer has a different mindset
than someone interested in eating. “It’s amazing that we
wondered why no one would come into the store when we
only had seven parking slots,” Adams says. “We’re now putting in 50 and placing the fuel island on the side of the store.”
Of course, these insights in no way mean CST is ignoring fuel.
In fact, in its investor call last fall, the company reported initial
success in developing pricing methods that build margins while
holding onto volume. Bowers also says CST now has the option
to choose other fuel brands or go unbranded (it’s currently testing the Corner Store fuel brand in Houston) as a way to enter
corners where a Valero-branded retailer already operates.
That said, shoppers wanting to go into the store do not
wish to run a gauntlet to get inside.
“Are we going to lure the pump customer in?” Bartys says.
“I’m not going to say never, but the fuel-only customer may
be coming in once every 10 days. The food customer ... may
come in three, four times a week, sometimes twice a day. Let’s
make it easier for him.”
Building a Brand
The ability to debut the Corner Store brand was a long time
coming, says Adams. Over 15 years, the company has had
three different Valero logos, all starting with the Valero mothership. Corner Store has the opportunity to establish itself
as a “fresh choice” both in its product offer and as a c-store
focus at the company’s fuel locations. Once CST gets past its
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current audience testing with its Corner Store logo, it intends
to go market by market, bombarding the consumer with
advertising about what’s behind the sign, he says.
But along the way, Valero did “own” the store side, Adams
emphasizes. It developed a private-label program of 200
SKUs, everything from beef jerky to salty snacks, soft drinks
to water.
“Private label does a lot for us,” he says. “It helps us understand the total cost of goods, allows us to negotiate with
national brands and give the customer good value.” Private
label also develops loyal customers, he says, who are interested
in visits to CST locations for those products.
While it has and does work with proprietary brands such
as Subway, Adams says the company kept much of its foodservice options tied to its own brand. Going forward, it’s
interested in partnering with national QSR brands at highway locations where it can draw in new customers, but for
the most part it intends to stay on its own Corner Store track.
And for Poye, that’s the opportunity. “We’re interested in
all levels of service, execution, margin and inventory to the
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point of driving quality food and great food experiences,”
Poye says. “Our challenge in the current environment is to
… make a broader brand that will drive a single vision and
that you can execute.”
Growth Minded
Bowers herself is bullish on the opportunities foodservice will
bring, especially at the new-build locations. “It’ll have a different
mindset,” she says. “What opportunities are we missing from a
food perspective?”
That said, growth must occur at the proper pace and with the
right kind of retail offer, she emphasizes. She says the industry is
ripe for consolidation and that for a location to sustain success
it needs to have scale, the ability to hold fuel margins and have
an established foodservice program—things small operators
may not have access to.
At the same time, she says that in the past year, her team has
looked at more than 1,000 sites and chose not to buy.
“It’s about having the correct sites,” she says. “And how we
grow customers vs. rooftops.”
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